Pursuit of scale has taken Larsen & Toubro to Mindtree’s doors

Once bitten, twice not so shy, Larsen & Toubro is making an aggressive attempt to acquire IT services company MindtreeNSE -1.74 %, almost a decade after it had lost the race to acquire scam-struck Satyam Computers. This acquisition could give L&T the scale that it has long desired. But acquiring the desired holding in the company may not be easy.

“I think it fits into the larger plan,” chairman of L&T Group, AM Naik told ET, when asked if Mindtree was a right fit for L&T. He declined to comment further, adding that the transaction was being led by chief executive officer and managing director SN Subrahmanyan.

ET reached out to the company for comments but did not elicit any response till the time of going to press.

The engineering conglomerate signed a deal with Café Coffee Day founder VG Siddhartha to buy his 21% stake in Mindtree, and announced plans to make an open offer for an additional 31% in the IT company. The company could potentially spend $1 billion to acquire controlling stake in Mindtree, in a hostile takeover that would be a first in India’s IT industry.

L&T has the appetite for the acquisition and a balance sheet to support it. Mindtree would add scale to its business and escalate its stature in the industry. L&T Infotech, which mainly has a presence in the manufacturing vertical, will get a strong presence in BFSI through Mindtree and benefit from a diversified customer base.

“They’ve done a great job spinning out L&T Infotech and it’s been complementary to the rest of their business. Part of the reason for the M&A is for scale. They need to get to above $2 billion to get more synergies and, more importantly, to expand into new markets and accounts,” said Ray Wang, founder, Constellation Research.

L&T has cash and cash equivalents of over Rs 8,000 crore, and has decided to be ‘asset light’, which means low capital expenditure in its traditional infrastructure business. The company has been exploring options to generate value for shareholders after the Securities & Exchange Board of India rejected its plan for Rs 9,000-crore buyback.

“The ambition is backed by money; there is not much that can stop L&T. The experience of resisting hostile takeovers in the past will only help strategize better,” an industry executive said. L&T Infotech, which was the brainchild of Naik who has spent over five decades with the company, has not been able to build scale to match the big boys of the IT industry.

In 2009, L&T had made an aggressive move to acquire the scam-hit Satyam Computer Services, and having accumulated shares in the secondary market, was also seen in the lead. The acquisition would have given L&T Infotech the scale it had aspired for but Tech MahindraNSE 0.16 % snatched it away in a nail biting bid. In a 2016 interview to ET, Naik had said, “We lost Satyam because we were too eager to buy it…I regret losing Satyam but life has to go on.”

But that was not the end of the company’s IT aspirations, under its strategic business plan ‘Lakshya 2021’, IT business was identified as key growth businesses and was given the mandate of exploring acquisitions. That it was a priority was apparent when as part of its succession plan, SN Subrahmanyan was given the responsibility of this business and he spent months in the US and Europe ahead of his appointment for at the top job.

Mindtree reported close to $850 million in revenue in FY18, still away from the $1-billion mark that it first aimed for 2012. Its growth and margins have been under pressure in recent quarters but the performance in December quarter with over $250 million in revenue has put it back on track to reach $1billion on a run-rate basis.

The hostile bid has shocked the IT industry, where deals are fought hard, but competitors remain friendly. Until Mindtree cofounder Subroto Bagchi tweeted that there was a threat of an imminent hostile takeover, few believed such a thing could happen. Founders of other IT companies see it as a negative development for the industry.

“In India, to do a hostile takeover you need to have a high level of trust in the management and promoters that they have strong and fair business ethics. Now this management will get displaced in a hostile takeover, so here honesty and integrity get punished,” Atul Nishar, founder and chairman of mid-tier IT firm Hexaware, told ET. He sold his stake in the company to private equity firm Barings Asia in 2013.

“This is an industry of first generation entrepreneurs who needed to give up stake to grow. Now if people see them getting bullied, what incentive will new entrepreneurs have?” he asked.

For Mindtree’s founders, who hold about 13% of the company, there are fewer options. On Friday, the company announced its board would meet this week to consider a share buyback move that could push up the price that L&T might have to pay.

ET had reported that the founders have also held discussions about pledging their shares and tying up with a family office to try to buy Cafe Coffee Day founder VG Siddhartha’s stake.